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					Affordability and Housing Market Areas

                  Colin Jones1, David Watkins1,
                Craig Watkins2 and Neil Dunse1

  1    School of Built Environment, Heriot-Watt University
  2    Department of Town and Regional Planning, University of Sheffield

July 2010
An important aspect of local housing market area (HMA) is the degree of local housing
market affordability. There are a number of different approaches to measuring affordability.
Affordability measures range from ratios, such as average price to average earnings and
lower quartile earnings to lower quartile house price to the use of residual incomes after
housing costs. These approaches have been fully reviewed by Whitehead et al (2009) for
NHPAU and it is not our intention here to replicate their analysis but to highlight the key
issues for this research.

It explores the way in which affordability measurement is currently approached in practice.
The review concludes by addressing whether different measures of local affordability might
be used as an additional means of exploring housing market area geographies. It is
suggested that, given the problems inherent in measuring affordability including those
imposed by data constraints, it is unlikely that measures of this type will be sufficiently
robust at local levels to offer a useful basis for geographic analysis.

Measuring Affordability
There is an extensive literature that debates the basis for defining households with
affordability problems and the means by which affordability should be measured (Hancock,
1993; Hulchanski, 1995; Chaplin and Freeman, 1999; Stone, 2006). The starting point for
affordability analysis requires a normative judgement about the costs of provision of an
‘acceptable’ standard of housing and the income that needs to be left over for other basic
non-housing requirements. There are two broad types of affordability measures used: one is
based on the ratio of housing costs to income and the other on the residual income
remaining after meeting housing costs. The former allows the researcher to identify the
proportion of income that should not be exceeded when paying for a home of adequate size
and quality. The latter is tied to an assessment of whether the income left over after paying
for a decent home is sufficient to allow a ‘reasonable’ standard of living.

As we note below, the use of ratios dominates practice in the UK. Critics suggest that this
type of indicator suffers from the fact that, for those on low incomes, an acceptable ratio
(where, for example, one third of income is spent on housing) may obscure the fact that the
residual income is well below acceptable poverty thresholds (Grigsby and Rosenburg, 1975).
Despite this criticism, however, the use of ratios has tended to be adopted in the interests of
simplicity and because the data requirements are a little less onerous. Nevertheless as we
show below they have become more sophisticated.

Affordability Measurement in Practice
The ratio of average house prices to average earnings is the simplest ratio and there are now
long time series for this ratio at national and regional levels. Such a ratio takes no account of
interest rates and mortgage repayments and so has only limited applicability as a measure of
affordability. An extension of this approach, undertaken by NHPAU (2007) is based the
ratio of the lowest quartile of house prices to lowest quartile of earnings for each local
authority in England.
More in depth and systematic studies on affordability examining local differences have been
undertaken by Bramley and Karley (2005) for England, Bramley et al (2006) for Scotland,
Wilcox (2006) for Britain, and Wilcox and Bramley (2010) for England. Unlike the
affordability measures above they are not based on (the distribution of) the incomes of the
population as a whole. Bramley et al (2006) estimate affordability in a series of steps. First,
income distributions for under 35 year olds are estimated in each local authority area.
Second, the lower quartile point in the local housing ‘market’ is calculated as a feasible
threshold of access. Finally the percentage of these households able to buy a house at this
threshold is estimated on the basis that they could borrow 3.5 times their income with an
allowance for family wealth providing help with the deposit.

The approach taken by Wilcox (2006) is similar in that it too focuses on the earnings of
young people seeking to buy a home but it targets smaller housing rather than the lowest
price housing. The study also first estimates traditional average house price to average
earnings ratios for each local authority area for these groups purchasing these house types.
Specifically the ratio is constructed based on a mean price for an equal mix of two and three
bedroomed houses and estimates of the average incomes of working households aged 20 to
39 years. The second stage of the analysis by Wilcox (2006) mirrors the Bramley research by
estimating the proportion of working households in each area unable to buy a local lower
quartile house price of two or three bedroom housing. The analysis assumes a maximum
mortgage of 3.75 times income for single earner households (adjustments are made for two
earners) and an 18 per cent deposit.

The most recent affordability study by Wilcox and Bramley (2010) for England repeats this
approach but focuses only on households under-40 years of age, distinguishing between all
such households seeking a two bedroomed home, working households similarly looking for
two bedroomed accommodation, and families requiring a three bedroomed home.
Affordability is modelled at local authority level across England using estimated income
distributions and house price thresholds. House prices were taken as the mid-point between
the 10% decile and 25% quartile price for a two and a three bedroom property in each area.
The affordability criterion used is 25 per cent of gross income. Assuming a 95 per cent
mortgage on a 25 year repayment basis, at an interest rate of 7.44 per cent, a combined
annual payment, including the repayment element, can be calculated. From this, a threshold
gross income level required to just afford to buy a threshold price level dwelling is derived,
ignoring any wealth or access to the 5% deposit.

Such studies become necessary because housing affordability targets became important in
the post-Barker era. These targets represented a key mechanism used in attempts to locate
market information at the heart of the evidence base used in planning for housing. An
affordability model was commissioned by CLG as a key analytical tool to underpin the
response to the Barker Review proposals (see Meen et al, 2005). This model was
instrumental in determining the target of reaching 240,000 new homes per annum that was
included in the 2007 Comprehensive Spending Review (HM Government, 2007). A similar
model with comparable outputs has recently been developed for the Scottish Government
(Leishman et al, 2008). The broad structure of the CLG model is summarised in the figure
Source: Meen et al (2005).

The model works on the basis that prices are determined by the interaction between demand
and supply. Housing demand reflects demographic changes (including the effects of
migration), earnings (and labour market conditions), interest rates and the relative
attractiveness of other tenures (measured by rents). Supply is generated in the construction
sector. By matching estimates of household formation that are sensitive to economic change
and the number of new homes, it is possible to model the likely effects on housing
affordability. The central affordability indicator applied is the ratio of lower quartile house
prices to lower quartile earnings. This methodology allows the translation of affordability
assumptions in to regional targets for new housing supply.

The central indicator used in this model appeared in other policy contexts. For instance, it is
was used as the previous Government’s headline affordability indicator in monitoring the
delivery of public sector agreement targets on improving the balance between housing
supply and demand. CLG also advocated that this measure should be employed at a variety
of spatial scales. Advice on how local authorities and regional planning bodies might
compute key housing market indicators proposed an affordability measure again based on
the ratio of lower quartile price (constructed from Land Registry data) to lower quartile
earnings (based on the Annual Survey of Hours and Earnings) (CLG, 2007). It suggested that
the indicator be analysed in absolute terms and/or against benchmarks including the
historic average ratio, the regional average and an alternative measure based on the ratio of
median house prices to median earnings.

Perhaps significantly there has been no clear rationale for the selection of this apparently
arbitrary threshold. There has been little overt discussion of the limitations of the measure
used, such as the weaknesses of the price measures on which the ratio is based, or the
problems with its construction. Wilcox and Bramley (2010) for example take issue with the
guidance arguing that affordability assessments based on 25% quartile house prices
overstate the actual barriers to households accessing owner occupied dwellings, and hence
considering the 10% decile.

Affordability Measures and HMA Geographies
The attraction of employing an affordability indicator as those described above is that it
relates price change to wider market demand and economic conditions. Affordability
measures generally make a link between a normative judgement about the cost of the
provision of some form of ‘adequate’ housing and the minimum ‘residual’ income required
for other basic non-housing requirements. In practice, however, data constraints mean that
the construction of robust affordability indicators is problematic. The studies reviewed
above are apparently sophisticated but there are problems of applying them to localised
geographies. The reliance on surveys to provide incomes/earnings data means that they are
most reliable at high levels of spatial aggregation.

The most significant constraint to extending the approaches described to local HMAs is the
absence of reliable local incomes/earnings data that limits the extent to which small spatial
building blocks can be used. The studies above use local authority areas as the basic unit of
analysis. CLG live table 577 gives the ratio of median house price to median income by local
authority district based on earnings data from the Annual survey of Hours and Earnings
(ASHE). This is the same data set that the Meen model uses for lower quartile earnings.
Beneath local authority level the sparsity of income data limits substantially the
sophistication of affordability measures. The Labour Force Survey provides information on
individual earnings and the smallest geographical unit is a local authority.. The Survey of
English Housing also provides individual income data but is based on a smaller sampling
base than the other two samples.

Wilcox and Bramley (2010) use a multi-stage procedure to estimate average incomes and the
distribution of incomes based on the Family Resources Survey (FRS) as part of their local
affordability estimates. Key determinants of income variation - occupations, earnings,
economic activity levels, household composition, age, tenure, housing characteristics - are
then used in conjunction with locally available data to predict income patterns for all local
authorities in England. The resulting local income estimates cannot be presented with
formal confidence intervals and the smaller the local area and subgroup of households the
greater the uncertainty.

To extend these affordability ratios down to HMAs that are not defined by local authority
boundaries will import measurement and data problems. It will require interpolation of
income data to ward level by reference to socio-economic characteristics data from the
Census that may be out of date. Commercially produced incomes data in this way, such as
CACI and Axiom, are arguably too unreliable at the local level to help solve this problem.
One potential way forward in this direction lies in exploring the potential of the ONS
synthetic average incomes estimates available at the medium Super Output Area level.
This focus on deriving these more localised ratios neglects the wider dimensions of
affordability, especially at the local level. Affordability is not just about access to home
ownership but the nature and types of housing available generally and to specific groups of
households in particular areas. It can be begin to be seen in terms of the distribution of
house prices, the prices of individual property types for which there is a relatively rich
database from the Land Registry that can be broken down to postcode areas facilitating use
at HMA level.      One way forward to avoid the income data impasse is to take certain
household types defined by socio-economic-demographic characteristics and assess their
affordable options by the interface with the Land Registry data. This approach has been
applied for example by the Halifax for key workers such as teachers or nurses on national
pay scales (eg Halifax, 2009) . The potential for this data is now shown by reference to the
North West.

There are 12 Framework HMAs impinging on the North West within which there are nested
56 Local HMAs as set out in Table 1 (which includes 5 Local HMAs beyond the region). Three
towns in rural HMAs – Barrow-in-Furness, Carlisle Kendal and Penrith are Framework and
Local HMAs and are shown in bold in the table. It is useful to remember that Local HMAs
represent the housing market from the perspective of individual households and the level of
affordability within them is important determinant of the opportunities available. The
analysis below first examines average house prices across the Framework HMAs of the
region, and then focuses on the Local HMAs within the Liverpool and Manchester Framework
HMAs. The analysis considers the affordability in these HMAs from the perspective of a
teacher in her/his 20s as an illustration.
Table 1 Structure of Framework and Local HMAs encompassing the North West region.

Framework HMA                                             Local HMA

Barrow-in-Furness                                         Barrow-in-Furness
Blackburn&Burnley                                         Accrington
Blackburn&Burnley                                         Blackburn
Blackburn&Burnley                                         Burnley
Blackburn&Burnley                                         Nelson
Carlisle                                                  Carlisle
Chester & Birkenhead                                      Birkenhead
Chester & Birkenhead                                      Chester
Chester & Birkenhead                                      EllesmerePort
Chester & Birkenhead                                      Flint
Chester & Birkenhead                                      Mold
Chester & Birkenhead                                      Wallasey
Chester & Birkenhead                                      Wrexham
Kendal                                                    Kendal
Lancaster                                                 Lancaster
Lancaster                                                 Morecambe
Liverpool                                                 Bootle
Liverpool                                                 Huyton
Liverpool                                                 Kirkby
Liverpool                                                 Leigh
Liverpool                                                 Liverpool(South)
Liverpool                                                 Liverpool(North)
Liverpool                                                 Northwich
Liverpool                                                 Runcorn
Liverpool                                                 St.Helens(North)
Liverpool                                                 St.Helens(South)
Liverpool                                                 Skelmersdale
Liverpool                                                 Southport
Liverpool                                                 Warrington
Liverpool                                                 Widnes
Liverpool                                                 Wigan
Manchester                                                Ashton under Lyne
Manchester                                                Bury
Manchester                                                Buxton
Manchester                                                Hyde
Manchester                                                Bolton North
Manchester                                                Bolton South
Manchester                                                Macclesfield
Manchester                                                Manchester
Manchester                                                Middleton
Manchester                                                Oldham East
Manchester                                                Oldham West
Manchester                                                Rochdale
Manchester                                                Rossendale
Manchester                                                Salford
Manchester                                                Stockport
Penrith                                                   Penrith
Preston&Blackpool                                         Blackpool
Preston&Blackpool                                         Chorley
Preston&Blackpool                                         Lytham St Annes
Preston&Blackpool                                         Preston
Stoke-on-Trent                                            Congleton
Stoke-on-Trent                                            Crewe
Stoke-on-Trent                                            Leek
Stoke-on-Trent                                            Newcastle-under-Lyme
Stoke-on-Trent                                            Stafford
Stoke-on-Trent                                            Stoke-on-Trent(North)
Stoke-on-Trent                                            Stoke-on-Trent(South)
Workington&Whitehaven                                     Whitehaven
Workington&Whitehaven                                     Workington
Table 2 Median House Prices by House Type in each Framework HMA
encompassing the North West 2005

Framework HMA               Median      Median      Median       Median
                           Detached      Semi-      Terraced    Flat Price
                            House      Detached      House           £
                            Price £     House        Price £
                                        Price £
Barrow-in-Furness           190,000     125,000      68,000       75,000
Blackburn&Burnley           185,000     118,000      56,000       92,975
Carlisle                    199,000     117,000      85,000       88,750
Chester& Birkenhead         248,625     145,000      95,000      119,950
Kendal                      285,000     186,000     158,725      135,000
Lancaster                   230,000     135,000     101,000       92,000
Liverpool                   210,000     128,500      81,500      120,000
Manchester                  240,000     139,000      88,000      127,000
Penrith                     250,000     170,000     142,000      110,000
Preston&Blackpool           215,995     131,000      93,425      112,000
Stoke-on-Trent              200,000     118,000      81,000      108,200
Workington&Whitehaven       190,000     100,000      74,575       85,500

Table 2 provides an overview of the relative prices of different house types across the
Framework HMAs of the North West. The Kendal HMA has the highest average prices with
Blackburn and Burnley the lowest. The variation in median detached house prices between
these HMAs is the order of 1 to 1.5 but for terraced houses it is nearly double emphasising
differences in local market house price structures. Different price structures exist in all
HMAs reflecting local market conditions and are a useful starting point to consider local
affordability issues. Table 3 translates these figures into a simple affordability measure for a
young teacher – the ratio of median house (type) price to a teacher’s salary in the mid-20s,
taken to be approximately £26k. In the major city HMAs a terraced house is just over three
times such a salary, in some relatively low demand areas this ratio falls to below three but in
the high priced areas around the Lake District it is over five.

The logic of the tiered HMA structure is that long term planning can be undertaken by
reference to Framework HMAs but in the short term the affordability problems of households
are best seen from the perspective of Local HMAs. The significance of the local agenda is
demonstrated by the analysis below of variations between Local HMAs within the Liverpool
and Manchester Framework HMAs. In the Manchester Framework HMA the local HMA of
Macclesfield has the highest median price for a detached house but Buxton (followed closely
by Stockport) has the highest median price for a terraced house.          There are subtle
differences in the relativities all Local HMA median house price type profiles, for example
Bolton South has the lowest median price for detached and semi-detached house types but
the HMAs with the lowest median price for terraced houses and flats are Oldham West and
Middleton respectively.
.   .
Table 3 Ratio of Median House Price to Teacher’s Salary in Mid-20s (approx £26k)
in each Framework HMA by House Type 2005

Framework HMA             Detached     Semi-      Terraced      Flat
                           House      Detached     House
Barrow-in-Furness            7.3         4.8         2.6        2.9
Blackburn&Burnley           7.1          4.5         2.2        3.6
Carlisle                     7.7         4.5         3.3        3.4
Chester& Birkenhead          9.6         5.6         3.7        4.6
Kendal                      11.0         7.2         6.1        5.2
Lancaster                    8.8         5.2         3.9        3.5
Liverpool                    8.1         4.9         3.1        4.6
Manchester                   9.2         5.3         3.4        4.9
Penrith                     9.6          6.5         5.5        4.2
Preston&Blackpool            8.3         5.0         3.6        4.3
Stoke-on-Trent              7.7          4.5         3.1        4.2
Workington&Whitehaven       7.3          3.8         2.9        3.3

Table 4 Median House Prices by House Type in each local HMA in the
Manchester Framework HMA 2005

Local HMA       Median     Median    Median       Median
               Detached    Semi-     Terraced    Flat Price
                House     Detached    House           £
                Price £    House      Price £
                           Price £
under Lyne      196950     115000      77000      119475
Bury            215000     135000      95000      106000
Buxton          249500     155000     125000      105750
Hyde            229950     137000      95000      109995
Bolton N        230000     135000      87500      113448
Bolton S        168500     107500      72000       92000
Macclesfield    295000     169950     115000      114000
Manchester      290000     159000      99000      140000
Middleton       185000     115500      78250       75000
Oldham E        186975     120000      73000       89725
Oldham W        235000     132000      63000      125000
Rochdale        200000     120000      80000      111225
Rossendale      200000     119000      75000      116600
Salford         200000     119999      80000      120538
Stockport       275000     159000     120000      120000

Table 5 gives the relative affordability of house types within the respective Local HMAs of
Manchester. The range of median house price to income ratios for terraced houses is from
2.4 to 4.8 across the Local HMAs, less than for the North West Framework HMAs which is to
2.2 to 5.5, but still a substantial disparity. The range is less for semi-detached houses and
flats but still of signifcance. While there are likely to be differences in character between
house types in different areas the results suggest limited spatial price arbitrage across the
Manchester Framework HMA.

Table 5 Ratio of Median House Price to Teacher’s Salary in Mid-20s (approx £26k)
in each Local HMA by House Type within Manchester Framework HMA 2005

Local          Detached    Semi-     Terraced     Flat
HMA             House     Detached    House
Ashton under
Lyne             7.6        4.4        3.0         4.6
Bury             8.3        5.2        3.7         4.1
Buxton           9.6        6.0        4.8         4.1
Hyde             8.8        5.3        3.7         4.2
Bolton North     8.8        5.2        3.4         4.4
Bolton South     6.5        4.1        2.8         3.5
Macclesfield     11.3       6.5        4.4         4.4
Manchester       11.2       6.1        3.8         5.4
Middleton        7.1        4.4        3.0         2.9
Oldham East      7.2        4.6        2.8         3.5
Oldham West      9.0        5.1        2.4         4.8
Rochdale         7.7        4.6        3.1         4.3
Rossendale       7.7        4.6        2.9         4.5
Salford          7.7        4.6        3.1         4.6
Stockport        10.6       6.1        4.6         4.6

The equivalent analysis for the Liverpool Framework HMA based on the evidence presented
in Tables 6 and 7 shows similar variations in the profiles of the Local HMAs. The range of
median house price to income ratios for the different house types is narrower, although the
difference between the lowest and highest median price of terraced houses in the Local
HMAs is only slightly reduced, varying from 2.6 in Liverpool South to 4.8 in Southport.
Table 6 Median House Prices by House Type in each local HMA in the Liverpool
Framework HMA 2005

Local HMA       Median         Median       Median         Median
               Detached        Semi-        Terraced      Flat Price
                House         Detached       House             £
                Price £        House         Price £
                               Price £
Bootle             220000        147250        75000         115500
Huyton             198975        119000        86000         116835
Kirkby             175995        112000        80000         105950
Leigh              179998        113875        72000         102748
Liverpool S        185000        115000        68000          86000
Liverpool N        245995        150000        87000         140000
Northwich          200000        125000       100000          93000
Runcorn            200000        115000        78500         109000
St.Helens N        229250        135000        85000         111975
St.Helens S        182000        113750        79950          98000
Skelmersdale       210000        138000        84950         106000
Southport          250000        152000       124500         119999
Warrington         237575        133000        94000         119950
Widnes             229950        129950        83000         113050
Wigan              189950        119500        83000         110000

Table 7 Ratio of Median House Price to Teacher’s Salary in Mid-20s (approx £26k)
in each Local HMA by House Type within Liverpool Framework HMA 2005

Local HMA          Detached       Semi-        Terraced         Flat
                    House        Detached       House
Bootle                8.5           5.7          2.9             4.4
Huyton                7.7           4.6          3.3             4.5
Kirkby                6.8           4.3          3.1             4.1
Leigh                 6.9           4.4          2.8             4.0
Liverpool(South)      7.1           4.4          2.6             3.3
Liverpool(North)      9.5           5.8          3.3             5.4
Northwich             7.7           4.8          3.8             3.6
Runcorn               7.7           4.4          3.0             4.2
St.Helens(North)      8.8           5.2          3.3             4.3
St.Helens(South)      7.0           4.4          3.1             3.8
Skelmersdale          8.1           5.3          3.3             4.1
Southport             9.6           5.8          4.8             4.6
Warrington            9.1           5.1          3.6             4.6
Widnes                8.8           5.0          3.2             4.3
Wigan                 7.3           4.6          3.2             4.2
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